Democratizing credit card payments: The good, the bad, and the disruptive

A variety of technologies have recently been released that promise to democratize the receipt of credit card payments; Twitter founder Jack Dorsey’s Square being the one generating the most buzz. Other notable entrants include Verifone and Mophie. What we’re talking about is a piece of hardware that hooks up to an iPhone or iPod Touch and allows users to swipe a credit card. In the case of Square, you don’t even have to have merchant account to use it—Square mediates that relationship for you. According to one report, “The terminals themselves are free; Square will make money on transaction fees paid by those accepting payments.” Moreover, Square founder are seeking “a software-only option that eliminates the need for the cube altogether.” The device also provides digital receipts via text and e-mail.

The boon for small operatives and peer-to-peer commerce is obvious. It’s a technology that will enable what we at nGenera are calling “the new localism,” or the opposing force to globalization spurred by both a struggling economy that has encouraged protectionism and “buy local” campaigns (e.g. see 3/50 Project), as well as environmental pressures to reduce transportation-related waste and third-world exploitation by supporting local production (e.g. see 100 Mile Diet).

Using devices like Square, anyone—from street artist to backyard food grower—can be a legitimate vendor accepting credit card payments. According to Om Malik (who calls it the beginning of the iEconomy):

“This is truly disruptive. The reason Square exists is because of three macro trends: the pervasiveness of the mobile Internet, the increase in the use of electronic payment systems and most importantly, the availability of low-cost, always-on computers (aka smartphones) that allow sophisticated software to conduct complex tasks on the go.

The marriage of computing and connectivity without the shackles of being tethered to a location is one of the biggest disruptive forces of modern times. It is (and will continue) to redefine business models, for decades. Square is simply riding these waves.”

But competitors are quick to point out flaws in the Square model. VeriFone CEO Douglas Bergeron (VeriFone plans to launch its own offering, PayWare Mobile in 2010) believes “that encrypting data on the iPhone itself—instead of before the data is loaded to the device—presents a security risk. Beyond that, he’s wary of Square’s decision to have a merchant account for the company itself but not requiring individual businesses to have their own. Bergeron said VeriFone’s offering will require merchants to have separate accounts. ‘It would be like sharing bank accounts with your neighbor: It just doesn’t work,’ he said.”

The URL for Square is squareup.com, as in “square-up with friends over a dinner tab,” which opens one’s imagination to the multitude of scenarios where one might need to square-up a debt or pay for a service. Dorsey and team’s target market is small business owners frustrated with credit card payments.

But what of illegitimate businesses? I’m currently reading SuperFreakonomics, which deals largely with how incentives drive human behavior. The book got me thinking about some of the more subversive uses of such a device. Specifically, the chapter, How is a street prostitute like a department store Santa? describes Chicago prostitutes that charge between $300 and $500 per hour, which may not be the kind of cash you want to be carrying around in the type of neighborhoods that support that trade. Would it be reasonable for a John to ask, “Do you take Visa?” What about cell phone-enabled drug dealers? Illegal firearm sales? Bribes? Gambling debts? Black-market goods? I wonder what the receipts would say. Much like reports of prostitution on Craigslist, social media (software and hardware) appears to provide an upside for both the legitimate and the insidious.

Of course, cash carries its own benefits as well. Most notably, it cannot be traced—a characteristic that the underground economy depends on. The cash transaction protects both the buyer and seller that require discretion. Also, for many legal, yet “under-the-table” transactions such as paying small vendors, contractors, or laborers, cash payments are preferable because they leave the door open for fudging income tax reporting.

Still, while it’s fun to muse over the possibilities, I believe the downside will be vastly outweighed by the upside. I’m excited to see how this plays out and how quickly such devices will be adopted (or how quickly they will be supplanted by software versions).

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